Employees Stock Option Plan – ESOP

Employees Stock Option Plan (ESOP)

ESOP (Employees Stock Option Pan) is a plan for issue of shares to directors and employees of a company at a discount (price lower than its Fair/Market value) as per agreement between the company and its employees.

It is an option granted by the company but not an obligation to be fulfilled by the employees by accepting this option or offer.

The Companies Act, 2013 (Section 53) prohibits issue of shares at a discount. But, through Section 54, it permits issue of ESOPs at a discount.

Main conditions of issuing shares under ESOP:

1) Shares are of the same class as already issued.

2) It is authorised by special resolution passed by the company.

3) This resolution must specify all the details of such shares, market price prevailing at that time, employees etc.

4)At least one year has elapsed since the commencement of the business by the company.

5)Listed shares must be issued according to the SEBI guidelines.

Main Terms relating to ESOP

Grant Date

It is the date on which agreement is entered into between the Enterprise and Employees for grant of ESOPs.

Vesting Period

It is the period between the Grant Date and the date on which all the specified conditions of Employees Stock Option Plan (ESOP) should be satisfied.

Vesting Date

It is the date on which conditions of granting ESOPs are met.

Exercise

It means exercising the right to subscribe the options granted to the employees.

Exercise Period

It is the period after vesting date given to an employee to exercise the options given under the Plan.

Exercise Price

It is the price payable by the employee for exercising the right for option granted.

Amount to be amortized each year = Value of option / No. of years in vesting period

Illustration

A company grants 1250 options under stock option scheme on 1st April 2012 at ₹80 when the market price is ₹200 and the face value is ₹10.The vesting period is 3 years. The maximum exercise period is one year.

a) Calculate the value of options.

b)Calculate the amount of Employee Compensation Expense to be amortized each year.

Illustration

A company granted option to subscribe 30 shares of ₹ 10 each at a price of ₹ 60 per share to each of its 100 employees on completion of service for 3 years. Fair (Market) price of each share as on the grant date was ₹ 90. The employees were to exercise the option within three years of the Vesting Date. All the employees exercised the option by the exercise date. Pass the necessary journal entries.

Solution:

1.

Year1

Employees Compensation Exp. A/c Dr. 30000

To Shares Options Outstanding A/c 30000

2.

Year2

Employees Compensation Exp. A/c Dr. 30000

To Shares Options Outstanding A/c 30000

3.

Year3

Employees Compensation Exp. A/c Dr. 30000

To Shares Options Outstanding A/c 30000

4.

Year4

Bank A/c Dr. 180000(30 X 100 X ₹60)

Shares Options Outstanding A/c Dr. 90000

To Share Capital A/c 30000 (30 X 100 x ₹10)Nominal Value

To Securities Premium Res. A/c 240000 (30 x 100 x ₹ 80)

Illustration

A company granted option to subscribe 50 shares of ₹ 10 each at a price of ₹ 60 per share to each of its 100 employees on completion of service for 3 years. Fair (Market) price of each share as on the grant date was ₹ 90. The employees were to exercise the option within three years of the Vesting Date. All the employees except 10 employees exercised the option by the exercise date. Pass the necessary journal entries.